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Starting a business in China is a great ambition for many budding entrepreneurs and an effective global strategy because of the constant growth of the Chinese market. China has something for everybody, but it is not always an easy place to do business and it is getting harder as a result of China’s harmonization of trade rules and tightening of loopholes. Tech in Asia recently recently reported on a seminar from Lean Startup Beijing that highlighted the benefits of opening a company in Hong Kong along with a WFOE in China. We think that there are some benefits to this strategy, but there are also some drawbacks to consider.

Here are a couple of the pros and cons to the strategy:

Pros

Tax Benefits

Opening a WFOE in China will require you to pay a 25% income tax on money made in China, while a Hong Kong Special Purpose Vehicle (HKSPV) has no tax on money made outside of HK. In Hong Kong, all funds can be managed easily and moved back and forth between the WOFE and HKSPV, for around a 5% transfer fee.

New Rules For WFOEs

As of March this year, there have been several changes that have made it easier for WFOEs to register. Minimum registered capital and capital verification have been eliminated, making the process to WFOE registration faster, cheaper, and more efficient.

Limited Liability

The HKSPV grants you limited liability, meaning the shareholder is liable up to the amount of capital invested. This company will also be liable for the registered capital of the WFOE. This approach may be better than the Joint Venture approach, as it gives more control and less room for conflict and disputes.

Cons

Cost

While there are some benefits to opening two companies, the downside is obviously the costs that will be incurred to run two accounts. It is easy to see why a lawyer may recommend opening two accounts (extra fees!), but this may not always be the right strategy for your business. Besides paying to open two accounts, you’ll also be responsible for the maintenance of two accounts, which may not be worth the extra hassle if your company isn’t yet generating enough capital.

Time Delays

Most start-ups want to hit the ground running and create their business as quickly as possible. While the WFOE isn’t the fastest option, as it generally taking 2-3 months, adding the extra step of getting a HK company doesn’t speed up the process. This adds extra paper work that many startups probably won’t want to deal with when trying to quickly launch.

Our recommendation for startups:

If you are a new company with limited funds, there is little reason for most companies to register a company in Hong Kong. The extra cost and time most likely won’t be worth it, unless you have a more complicated business structure. However, for a company that has the resources, the WFOE/HKSPV strategy may be a good one to pursue for tax benefits and limited liability.